What Is the Debit/Credit Effect of an Unearned Revenue?


Credit and debit transactions have different effects on an unearned revenue account, depending on the economic event and the procedural treatment accountants want to give the transaction. This treatment draws on corporate bookkeeping guidelines, industry standards and edicts coming from organizations as diverse as the U.S. Securities and Exchange Commission, the Financial Accounting Standards Board and the American Institute of Certified Public Accountants.

Unearned Revenue

Unearned revenue is money a business receives before providing a service or delivering merchandise as part of a contractual agreement. The organization hasn't yet performed its share of the commercial covenant -- the other name for a contractual agreement -- and that's why it classifies the revenue as "unearned." Unearned revenue -- also referred to as deferred income -- is a liability, meaning the corporate cash recipient owes the funds if it fails to abide by contractual terms. If these terms cover a period exceeding 12 months, unearned income is a long-term debt; otherwise, it's part of the "short-term liabilities" section.

Debit Effect

As an operating liability, unearned revenue goes down when a corporate bookkeeper debits the account. For example, if a business partially honors its share of the applicable contractual agreement, it can legally earn the related income. To reflect this reality in company books, a record-keeper debits the unearned revenue account and credits the revenue account.

Credit Effect

Under generally accepted accounting principles, a bookkeeper credits an unearned revenue account to increase its worth. When a business receives a cash advance from a customer, an accounting clerk debits the cash account and credits the unearned revenue account. In a financial glossary, debiting cash -- an asset account -- means increasing money in operating coffers. This treatment is distinct from the banking terminology, in which debiting a client's account means reducing funds in the account. When accountants talk about a bookkeeper, record-keeper or accounting clerk, they're referring to the same professional.

Financial Reporting

As a liability account, deferred income goes on a statement of financial position, also referred to as a balance sheet or statement of financial condition. As a business executes its part of the applicable operating agreement, it earns the corresponding income and sees its statement of profit and loss go up. Finance people use phrases such as "statement of profit and loss," "statement of income," "income report" and "P&L" interchangeably. When a company receives cash upfront and performs work later, the money makes it into a statement of cash flows, the other name for a liquidity report. When earned, revenues ultimately make up net income, which feeds into the retained earnings master account -- an equity statement item.

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